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Mining marriage a messy affair for Xstrata and Falconbridge

Published by MAC on 2005-08-23

Mining marriage a messy affair for Xstrata and Falconbridge

By Eric Reguly, Canada Globe and Mail

Tuesday, August 23, 2005

To listen to Xstrata boss Mick Davis, you would think Xstrata and Falconbridge are a marriage made in heaven. The two companies adore one another, in spite of their exceedingly short courtship, and will do wonderful things together. It's a nice romantic story. It's also news to Falconbridge.

Xstrata is the Swiss mining group that last week snapped up 19.9 per cent of Falconbridge for $28 a share, for a total of $2-billion. Brascan sold the stake. In the conference call, Mr. Davis said "we have a very good relationship" with Falconbridge management, led by CEO Derek Pannell. He said Xstrata has the "expectation" of gaining board representation, as if it were a done deal.

Mr. Davis is calm, smooth and slick. He left the impression Falconbridge will virtually leap into Xstrata's arms should Xstrata decide to buy the 80.1 per cent of the Canadian mining and smelting group it does not already own. Good luck. This story is far from over and things probably won't go as smoothly as Mr. Davis suggests.

Brascan had been trying to unload its mining assets -- a significant minority stake in Noranda, which in turn controlled Falconbridge -- for years. China Minmetals came close to buying the Noranda-Falconbridge combo last year. After the deal fizzled, Brascan overhauled the mining companies' ownership structure to make them more palatable to prospective buyers. Noranda merged with the more attractive Falconbridge. Brascan emerged with 19.9 per cent of the enlarged company, which took the Falconbridge name.

It worked -- too well for Falconbridge, which had fantasies of an independent life as a bigger, stronger player in a hot industry. Xstrata pounced. The deal was put together only days before the Aug. 15 announcement. Brascan, whose offices in Toronto's BCE Place are one floor apart and connected by an open staircase, did not tell Falconbridge that Xstrata was coming. Mr. Pannell had no time to prepare for the news. He could not have been happy, especially since he probably would lose his job the moment Xstrata bought the rest of the company, which Xstrata strongly suggested it would do (Mr. Pannell would not comment).

Mr. Pannell and Falconbridge are suddenly in awkward and a difficult position. Brascan, which had been an ally for two decades, no longer cares an iota about Falconbridge's desire for independence. In fact, it's in Brascan's best interests to see Falconbridge sold. That's because Xstrata has agreed to pay Brascan the difference between the $28 a share Brascan has already received and any higher price it offers for the rest of Falconbridge.

Xstrata obviously hopes to get the other 80.1 per cent of Falconbridge as cheaply as possible. Mr. Pannell has a fiduciary duty to get the highest price possible. Given the opposing goals, you can bet that the Falconbridge board will not take kindly to Xstrata's requests for board representation. Xstrata may not be a hostile suitor (yet), but it's not considered friendly either.

How is Mr. Pannell to get out of the mess thrust upon him? He really has only two options, neither easy. The first is to get the share price up to the point that Xstrata and other potential suitors will take a pass on Falconbridge. The second is to recruit a white knight that will let him keep his job. Mr. Pannell is 58 -- not a young man, but too young to retire.

This is where things might get really interesting. On the other side of downtown Toronto, Inco, with no controlling shareholder and vast exposure to a high-flying metal -- nickel -- is looking vulnerable too. Why not put the two together to create an international mining powerhouse?

The idea has been around for years and was always fraught with difficulties. Together, Inco and Falconbrige might elicit rude calls from the competition authorities. It would result in big domestic job losses. In any event, it was never more than a fantasy because Brascan controlled Falconbridge (and Falconbridge's former parent Noranda).

But the world has changed in recent years. Inco and Falconbridge have victim written all over them as giants such as Anglo American, Rio Tinto and BHP pick off second-string names. If Falconbridge goes, Inco might be next and Canada's mining industry would get gutted.

The business case for putting Inco and Falconbridge together is not overwhelming. But it's far from absent. Combining the companies' Sudbury, Ont., mining and smelting operations would save a lot of money, although at the expense of jobs. Some synergies present themselves in New Caledonia, where both companies are investing billions in new nickel operations. Inco's Voisey's Bay nickel deposit, in Labrador, would be attractive to Falconbridge.

Scott Hand is the CEO of Inco. He is 63, faces retirement and wants to return to the United States, where he's from. Inco has already launched an informal search for his replacement. Is Mr. Hand willing to risk merging Inco and Falconbridge in his final years when he could just slip away to the golf course with his fortune? The effort could fail. But if it worked, he would be the hero that saved the two biggest names in Canadian mining from branch plant status.

Falconbridge becomes quarry for takeover after Xstrata deal Swiss miner scoops up Brascan holding, raising the spectre of a total buyout

By Wendy Stueck, Mining Reporter, Canada Globe and Mail

Tuesday, August 16, 2005

Vancouver -- Swiss mining powerhouse Xstrata PLC has agreed to pay $2-billion for a 19.9-per-cent stake in Falconbridge Ltd., raising the possibility that the Swiss company will swallow Canada's biggest mining company.

Xstrata, a major copper and coal producer that has a stock market value of more than $15-billion (U.S.), announced yesterday that it had purchased Brascan Corp.'s stake in Falconbridge, triggering speculation that the Swiss company's next move would be to acquire the rest of Falconbridge.

Toronto-based Brascan has long wanted to cut its resource holdings to focus on property, power and funds management.

Xstrata chief executive officer Mick Davis played down the possibility of a takeover, saying that "it is wrong to assume that today's acquisition will lead necessarily to an offer for the remaining common shares of Falconbridge."

But in a conference call to discuss the deal, Mr. Davis hinted at future developments.

"I think that the value in this investment is the option which it gives us," he said. "We don't intend to be a long-term shareholder with minority interest in the company."

Analysts said Xstrata isn't in the habit of hanging on to minority positions.

The company, whose predecessor operations go back to the 1920s, is the world's biggest exporter of thermal coal and a major producer of copper and zinc. Its biggest shareholders include trading company Glencore International AG, which controls a 40-per-cent stake. Xstrata reported sales of $6.5-billion last year, compared with 2004 sales of $7-billion from the combined operations of Noranda and Falconbridge.

"They are not in there just to hold a stake in Falconbridge," said analyst Greg Barnes of Canaccord Capital. "That is not their business; they are a mining company."

Xstrata's purchase will be seen as a pre-emptive strike by other potential bidders for Falconbridge, said Victor Lazarovici, a mining analyst with BMO Nesbitt Burns.

Mr. Lazarovici also expects Xstrata to increase its stake.

Mr. Davis is a deal maker who has probably overseen more big acquisitions than any executive in the mining industry, Mr. Lazarovici said.

As the former chief financial officer of London-based resource player Billiton, Mr. Davis helped push through several important deals, including the blockbuster 2001 deal that created BHP Billiton.

Since taking the helm of Xstrata in 2001, Mr. Davis has closed a controversial $3-billion takeover of Australian miner MIM Holdings Ltd. and made a failed bid for WMC Resources Ltd.

Xstrata is known for being a strategic player whose actions sometimes prompt rivals to make competitive moves, Mr. Barnes said.

That bid was trumped by one from rival BHP Billiton, which announced a friendly, $7.3-billion offer for WMC in March and completed the takeover this year.

With BHP sewing up the WMC transaction, which included the massive Olympic Dam ore body in Australia -- a mine with big stores of copper, uranium, gold and silver -- speculation soon shifted to what Mr. Davis would pursue as an alternative.

Prices for commodities such as copper, nickel and uranium are at multiyear highs and resource companies are trading at correspondingly high levels, making potential acquisitions expensive.

But with players such as Brazilian iron ore giant Companhia Vale do Rio Doce plowing billions into new projects and acquisitions, few expected Xstrata to stand still for long.

Last month, there were rumours that Xstrata was eyeing Toronto-based nickel producer Inco Ltd., which has two major new nickel projects under construction at a time when prices for nickel are soaring.

But Xstrata instead went for a stake in Falconbridge, also a significant nickel producer. The miner currently does not have any nickel in its global portfolio, which includes copper, coal and zinc assets as well as exposure to other metals.

Xstrata's foray into the Canadian mining sector comes as the dust is still settling from the merger of the former Noranda Inc. and Falconbridge. That combination came about after talks between Noranda and China Minmetals about the possible sale of Noranda to the Chinese company wound up without a deal.

Under the terms of the deal between Brascan and Xstrata, $375-million of the purchase price will be settled through a convertible debenture issued by Xstrata.

Falconbridge shares gained 87 cents (Canadian) to close at $29.25 on the Toronto Stock Exchange yesterday.

Xstrata rose 79 pence ($1.71) to £13.52 on the London Stock Exchange yesterday.

A mining giant

The $2-billion purchase of a 20-per-cent stake in Falconbridge is the latest 'bolt-on' acquisition by the Swiss mining giant Xstrata PLC, which is aiming to build its four main commodity divisions.

* Alloys

Headquartered in Rustenburg, South Africa, Xstrata's alloys division is the world's largest integrated ferrochrome producer. Xstrata also produces vanadium pentoxide and ferrovanadium from mines in Australia and South Africa.

About 80% of global alloys production is used to make stainless steel.

'04 sales: $953-million (U.S.)

* Coal

Headquartered in Sydney, Australia, Xstrata's coal division is the world's largest producer of export thermal coal and a significant producer of coking coal. Its operation employ about 10,--- people in 30 mines in Australia and South Africa.

Coal generates about 33% of world's electricity.

'04 sales: $2.7-billion (U.S.)

* Copper

Headquartered in Brisbane, Australia, Xstrata's copper division produces copper concentrates and copper cathode in Queensland, and copper-gold concentrates and gold ore in Argentina. The division is evaluating a copper project in Peru.

About 75% of global copper production is used by telecoms and for power transmission.

'04 sales: $1.6-billion (U.S.)

* Zinc

Headquartered in Madrid, Xstrata Zinc became the world's largest producer of zinc concentrates and refined zinc when it acquired the Spanish zinc operation of Asturiana de Zinc SA in 2001. It also has zinc and lead operations in Germany, Australia and Britain.

About 80% of global zinc production is used for galvanizing steel and die-casting alloys and brass.

'04 sales: $1.2-billion (U.S.)

Testing the sterling in Glencore's record

By Eric Reguly, Canada Globe and Mail

Tuesday, August 16, 2005

If you didn't like the idea of a Chinese company buying Noranda and Falconbridge, you should be delighted the two Canadian mining players are instead going to a Swiss concern, called Xstrata. Switzerland is the symbol of European purity. The Swiss are polite, don't toss wrappers on the ground and are capitalists too! They are decent folk buying decent Canadian companies.

You might also be deluding yourself. Xstrata is 40-per-cent controlled by Glencore International, the commodities trader that is one of the world's largest and most secretive private companies. What little is known about Glencore isn't pleasant. It was formed by the fugitive financer Marc Rich, now 70, who was mysteriously pardoned by Bill Clinton in the dying hours of his presidency.

Although no longer associated with Mr. Rich, Glencore is run by a gaggle of former Rich lieutenants, among them Willy Strothotte, who is chairman of Glencore and a director of Xstrata. The U.S. Central Intelligence Agency had exceedingly rude things to say about Glencore in the oil-for-food scandal, all of which are denied by Glencore. People who know Xstrata say Xstrata "suffers" from Glencore's reputation. That much is obvious.

Xstrata yesterday announced the purchase of 19.9 per cent of Falconbridge (the company recently formed by the recent merger of Noranda and Falconbridge) from Toronto's Brascan for about $2-billion, or $28 a share. The move was purely opportunistic. Brascan has been trying to unload its underperforming mining and smelting assets, first assembled in the early 1980s under the Jack Cockwell reign, for years.

It's an open secret Xstrata would have preferred Inco, which has bigger and more productive nickel reserves and conveniently lacks a controlling shareholder. But Xstrata fears hostile deals, especially after its bid for Australia's WMC Resources got trumped by BHP Billiton earlier this year. An Xstrata bid for Inco would probably have encouraged competing bids from BHP, Rio Tinto or Anglo American, the Big Three global mining groups. Better to have 19.9 per cent of the consolation prize than get involved in a takeover game you're likely to lose. Note that Inco shares fell yesterday with the deletion of one name -- Xstrata -- from the list of potential acquirers.

Xstrata boss Mick Davis made it clear owning all of Falconbridge was the possible next move, though not a certainty. "We don't intend to be a long-term investor with a minority interest in the company," he told Bloomberg News.

In all likelihood, Xstrata will not take the heat that China Minmetals took last autumn from a few politicians and some media, when it appeared all but certain it would buy Noranda (the deal fell apart). Too bad. If China Minmetals, which is controlled by a Communist government with an atrocious human rights records, deserved scrutiny, so do Xstrata and Glencore.

Glencore was created in the mid-1970s by Mr. Rich to trade metals, minerals, crude oil and, later, grain. In the 1980s, it bought interests in resource companies and today owns significant stakes in three public companies, among them Xstrata. Last year, Glencore had sales of $72-billion (U.S.) on assets of $23.5-billion. According to published reports, including a July investigation by BusinessWeek magazine, Mr. Rich was notorious for trading with Iran during the hostage crisis, South Africa during apartheid and Libya and Cuba during the U.S. trade embargoes.

In 1983, he was indicted by the U.S. Justice Department for racketeering, trading with the enemy (Iran) and tax evasion. He fled to Switzerland. His pardon by Mr. Clinton meant he was exempt from punishment from any criminal conviction. The pardon triggered investigations in both houses of Congress and fierce criticism from Democrats and Republicans. Investigators wanted to know whether Mr. Rich's ex-wife, Denise, who gave an estimated $1-million to various Democratic causes, including the Clinton library, could explain Mr. Clinton's bizarre behaviour.

Mr. Rich sold his interests in Glencore in 1994, amid rumours of a fight between him and his partners. His lawyers and Xstrata officials say he has no interests in either Glencore or Xstrata. But his legacy lives on. Three Xstrata directors have top positions at Glencore; they are all survivors from the Marc Rich era.

Glencore's -- and by extension Xstrata's -- problems didn't end with Mr. Rich's departure and presidential pardon a few years later. The Iraq oil-for-food scandal took care of that. Last year, a CIA report alleged Glencore paid $3.2-million in illegal surcharges to Iraq for Iraqi oil. Glencore denies any illegal or inappropriate dealing with the Iraqi government outside of the UN-administered oil-for-food program.

Xstrata's association with Glencore became an issue in Australia during the battle for WMC. Politicians and lobby groups said Xstrata's bid for WMC should have been blocked (the government ultimately said it could go ahead). Xstrata isn't buying control of Falconbridge. So far, it's just a passive investment. But the status quo is likely to change as the mining industry consolidates. Xstrata should at least explain how it and Glencore are truly independent from each other, as they claim they are.

'King of Zug' reigns over trading network - Controversial Marc Rich has long been a part of the buying and selling of the world's mineral wealth,

Gordon Pitts, Canada Globe and Mail

Tuesday, August 16, 2005

The peaceful Swiss canton of Zug, with its lovely old town and sailboat-dappled lake, seems an unlikely setting for a mysterious and controversial trading empire.

Yet this pastoral playground is the home base of Marc Rich, the former fugitive billionaire commodities trader, who was pardoned by Bill Clinton in his last day as U.S. president in early 2002.

It is also the headquarters of Xstrata PLC, the mining powerhouse which yesterday bought 19.9 per cent of Canadian nickel giant Falconbridge Ltd., putting it in position to launch a potential takeover bid for the company.

Xstrata often gets mentioned in the same breath as Mr. Rich. Both are part of the huge trading community drawn to Zug by extremely low taxes, privacy and comfortable surroundings. (Canadian auto parts tycoon Frank Stronach also has a vacation place there.)

Through this small canton, a large chunk of the world's mineral and energy wealth is traded, often by Marc Rich & Co. Mr. Rich, 70, has been called the "king of Zug," which boasts about 10,000 international companies.

Mr. Rich and Xstrata share another bond.

Thirty years ago, Mr., Rich founded Glencore International AG, a secretive trading Goliath also based in Zug. Glencore is now Xstrata's largest shareholder with a 40-per-cent interest in the company and three of its executives sit on the board.

Mr. Rich sold Glencore in the mid-1990s to its senior management group. Glencore, today a private company with annual revenue worth $72-billion (U.S.), says it now has nothing to do with Mr. Rich.

BusinessWeek, in an investigative article last month, described the vast international trading network Mr. Rich helped create in Zug as "The Rich Boys," and listed Glencore's key managers as "former Rich bigwigs."

It is understandable that Glencore would be eager to play down its Rich roots. The globe-trotting billionaire is as much a magnet for controversy as for personal wealth -- estimated by Forbes last year at $1.1-billion, the 514th largest fortune in the world.

His major brush with notoriety came in 1983 when he fled the United States, having been indicted in federal court of evading more than $48-million in taxes. He was also charged with 51 counts of tax fraud and with running illegal oil deals with Iran during the hostage crisis of the late 1970s.

It meant leaving the country that had sheltered him in 1942, as the child of a Belgian Jewish family that had fled Europe amid the Nazi onslaught.

At 19, Mr. Rich dropped out of New York University and joined Philipp Brothers, then the world's largest raw-materials trading company.

He started in the mailroom but soon came to the attention of legendary trader Ludwig Jesselson, becoming Mr. Jesselson's heir apparent. But in 1975, Mr. Rich and his partner, Pincus (Pinky) Green, quit Philipp Brothers, taking some of its leading traders with them.

The timing was splendid. In the 1970s' global energy shakeup, oil-producing countries rebelled against the international oil companies, and began selling their oil through traders such as Mr. Rich. He is credited as the father of the spot market, in which oil was freely traded to the highest bidder.

As the price of oil skyrocketed, he was able to grab the escalating margins between buying and selling prices. His new role also led him into relationships with pariah states, including Iran during the hostage crisis, apartheid-era South Africa, North Korea, and a then hard-line Libya.

"He sees himself as a citizen of the world, unencumbered by the laws of sovereign nations," Howard Safir, a former U.S. marshal told the Washington Post in 2001. Mr. Safir became familiar with Mr. Rich by waiting outside his Swiss residence in 1985, trying vainly to enforce an arrest warrant against the fugitive trader.

Mr. Rich's exile has been no material hardship. He still spends much of his time at his villa on Lake Lucerne, which is lavishly appointed with Picassos, Van Goghs and Miros. He owns places on Spain's Costa del Sol and in the ski resort town of St. Moritz.

In 1986, he was divorced by his wife Denise, who returned to the United States with their three daughters, including Gabrielle, who later died of leukemia in 1996. Mr. Rich was unable to attend her funeral.

He remarried in 1998 to Gisela Rossi, while Denise became a Grammy-nominated songwriter and a generous fundraiser to Democratic Party causes, including $70,000 to Hilary Clinton's Senate campaign and $450,000 to the Clinton presidential library fund.

She also lobbied heavily for her ex-husband's pardon, although Mr. Clinton has denied there was any connection between her efforts and his action. He says the Justice Department was in favour of the pardon.

Yet the former president says he now regrets the move. "It wasn't worth the damage to my reputation," he told Newsweek magazine.